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The SEC proposed changes to Rule 17a-7 that would restore registered funds’ ability to cross-trade most fixed-income securities and update conditions for pricing and oversight. The proposal also calls for aggregated reporting; it is not yet a final rule, and the public comment period will run for 60 days after Federal Register publication.
The Securities and Exchange Commission proposed amendments on Oct. 9 to Rule 17a-7, which governs securities transactions between registered funds and certain affiliates. The proposal would allow funds to cross-trade most fixed-income securities again, subject to revised pricing and oversight conditions and new aggregated reporting requirements; it is not yet in effect.
Cross trades are transactions in which a registered fund buys a security from, or sells one to, an affiliated party rather than completing the trade on the open market. Rule 17a-7 permits such transactions only when its conditions are met. The SEC says the proposed changes would modernize and expand those conditions, with the aim of allowing trades that benefit funds and shareholders, including by reducing trading costs.
The proposal would update requirements related to pricing and oversight, reflecting market developments that the SEC says have made pricing more verifiable and transparent. It would also require registered funds that engage in cross trading to provide aggregated reports of trading activity and cross trades. The commission described the reporting as an additional transparency measure.
SEC Chairman Paul S. Atkins said the amendments are intended to make cross trading available in more circumstances while adding investor protections. The SEC has not adopted the amendments. Their eventual scope and effect will depend on the final rule, if one is adopted, after the public comment process.
Potential Savings for Fund Investors
If adopted, the proposal could give funds more opportunities to trade eligible securities directly with affiliates instead of using open markets. The SEC says appropriately executed cross trades can help funds avoid some open-market transaction costs, potentially reducing expenses borne by funds and their shareholders. These are the commission’s stated potential benefits, not a guarantee that funds will achieve savings in every trade.
The change is particularly relevant to fixed-income funds. The SEC says the 2020 adoption of the Investment Company Act’s fund valuation rule effectively restricted cross trading in most fixed-income securities. The proposal would restore that capacity while revising safeguards around how trades are priced and supervised. For investors, the practical impact would depend on whether funds choose to use the expanded permissions, the costs they avoid, and the protections in any final rule.
Reporting requirements may also give regulators and other observers more information about cross-trading activity. The source release does not specify the full reporting format or explain what information would be publicly available, so the transparency effect cannot yet be assessed in detail.
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From Rule 17a-7 to the Proposal
The SEC adopted Rule 17a-7 in 1966. According to the commission, registered funds relied on it to trade both equity and fixed-income securities. The rule applies to transactions between a registered fund and certain affiliates and sets conditions intended to govern those trades.
In 2020, the commission adopted the Investment Company Act’s fund valuation rule. The SEC says that development effectively restricted cross trading in most fixed-income securities, while the commission acknowledged at the time that it was considering possible revisions to Rule 17a-7. The Oct. 9 proposal is the next step in that process: it would broaden eligibility and revise conditions covering pricing, oversight and reporting.
The announcement describes a proposal, not a change to current requirements. The SEC says the proposed amendments will be published on SEC.gov and in the Federal Register. The formal publication starts the period for public comments.
“When executed appropriately, cross trades allow registered funds to avoid costs associated with open market trades and to then pass those savings on to investors.”
— SEC Chairman Paul S. Atkins
Details Await Public Review
The proposal’s final terms are not settled. The SEC release does not provide the full text of the proposed amendments, so the precise conditions for eligible trades, pricing methods, oversight responsibilities and aggregated reporting cannot be fully described from the announcement alone.
It is also unclear how many funds would use the expanded permissions or whether cross trading would produce measurable savings for shareholders. The commission presents cost reductions as a potential benefit, but provides no estimate of expected savings. The proposal does not establish that every trade would lower costs or that any savings would be passed through in a particular amount.
The comment period has not begun as of the announcement; it will run for 60 days after publication in the Federal Register. The SEC has not announced a final-rule date in the supplied material.
Federal Register Starts Comment Period
The SEC says it will publish the proposal on SEC.gov and in the Federal Register. Once it appears in the Federal Register, the public will have 60 days to submit comments. Fund companies, investors and other interested parties can use that period to address the proposed eligibility changes and safeguards.
After reviewing comments, the commission may revise the proposal, adopt a final rule, or take other action. The announcement does not set a schedule for a commission vote or say when a final decision might come. Until the SEC completes that process and any final amendments take effect, the existing Rule 17a-7 requirements remain in place.
Key Questions
What is cross trading under Rule 17a-7?
It is a securities transaction between a registered fund and certain affiliates. Rule 17a-7 permits these transactions only when applicable conditions are met.
What securities could become eligible under the proposal?
The SEC proposal would restore the ability to cross-trade most fixed-income securities, which the commission says were effectively restricted after adoption of the fund valuation rule in 2020. The proposal would also modernize the rule’s conditions.
Would the proposal automatically reduce fund costs?
No. The SEC says appropriately executed cross trades may help funds avoid costs associated with open-market trades. The proposal does not guarantee savings or specify how much investors might benefit.
When can the public comment?
The comment period will remain open for 60 days after the proposal is published in the Federal Register. The SEC’s Oct. 9 announcement said that publication was forthcoming.
Is the expanded rule already in effect?
No. The SEC has proposed amendments, but has not adopted them. Existing Rule 17a-7 requirements remain in place while the proposal proceeds through the comment and rulemaking process.
Source: primary
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